Managerial Economics and Opportunity Set

A recent newspaper circular advertised the following special on tires: "Buy three, get the fourth tire for free—limit one free tire per customer." If a consumer has $360 to spend on tires and other goods and each tire usually sells for $40, how does this deal impact the consumer's opportunity set?

Solution Preview

The consumer's original budget line is ADB. This is because without the deal, if a consumer has $360 to spend on tires and other goods, and each tire usually sells for $40, then the consumer can buy 9 tires.
360/40 = 9

When the consumer is offered "buy three get one free", the budget line becomes ADEF. ...

Solution Summary

This solution contains 223 words and one graph explaining how the budget line changes and also how the deal impacts the consumer's opportunity set.